Limited Government and Free Market Views in Delaware

Archive for February, 2017

The House Ways and Means Committee 2008 timeline for Obamacare rollout pre-ordained a complete failure of the health insurance industry in 2017 and 2018. The mechanism of the economic failure known as the “Death Spiral” can be best described by adverse selection. Expensive sick patients are staying in and healthy customers are bailing out.

In December, Highmark offered my wife and me a plan in which our premiums for the year would be $19,000 with a combined deductible of $15,000. We bailed out to Medi-share for a vastly reduced amount of money. Highmark BCBS is now in full-fledged collapse mode, greatly exacerbated by eliminating their HMO option and forcing people into high deductible PPO plans. Their biggest block of patients, Delaware state workers, is at risk. Their biggest problem is Aetna which is making a move to consolidate complete control of the Delaware health insurance market, (they just displaced Geisinger as the health insurer for the state’s second largest employer, Christiana Care Health Systems). Aetna may actually survive the death spiral by sheer size and being the last man standing, thereby dictating rates.

The most recent instruction from President Trump to the IRS to not require tax filers to tell whether or not they purchased health insurance in 2016 accelerates the pace of the collapse by eliminating the risk of a penalty for healthy people not participating in the insurance pool. The pool of covered lives is therefore populated with sicker people. Mandated insurance coverage which eliminates denial for pre-existing conditions causes a situation where an uninsured person can develop an expensive disease and then immediately gain insurance coverage, of course at a substantial loss to the insurer.

All of this was obviously predictable, as I wrote in 2009, by simply looking at the timeline. 2017 and 2018 were baked in 8 years ago. Looking forward, the most optimistic chance for stabilization of the chaotic and insolvent market can only begin in 2019. By that time, the temporary federal Medicaid subsidy to Delaware will be gone and Delaware’s budget will not be able to be balanced. Between the loss of free market health insurance competition, the burgeoning cost of Medicaid, and the cost of providing health insurance to Delaware state workers and pensioners, the budget will be busted.

In reality, education reform is about economics. If done properly, it will attract/retain businesses, provide jobs, generate tax revenues, increase property values, reduce crime rates, and reduce the single largest item in the state’s budget. This was the direction taken in 1995 by Gov. Carper, State Superintendent Mike Ferguson, and a business consortium (DuPont, Bell Atlantic, Delmarva Power, Hercules, Zeneca, and Christiana Care) when they advocated for change in Delaware’s public education system.

To be clear, we must first distinguish between teaching and education. Teaching is a profession consisting mainly of teachers with special knowledge and training who exercise personal judgment in carrying out their responsibilities with students in the individual school buildings. The broader concept of education, however, is a business.

The 1995 concept of Delaware education reform was implemented in a pilot program at a school that proved to be very successful. In a study conducted by Dr. Gary Miron of the Evaluation Center at Western Michigan University at the request of the Delaware Department of Education and the State Board of Education, he observed that students at the new school were, “…outperforming their counterparts at similarly matched traditional public schools…” The school achieved national recognition and generated a substantial operating surplus.

The essence of this bold plan was to shift operational decision-making authority from a school board and district into the individual school building. Control was now local and exercised by a principal working with teachers, answerable to parents with oversight and support provided by a board. Andreas Schleicher, a member of Rodel’s International Advisory Group, presented data at a Rodel Foundation Education Event to show that, when a school is given that type of autonomy, student performance is improved.

The significant reduction of district and board responsibilities should lead to a reduction of the number of school districts from 19 to 5 (1 in Sussex, 1 in Kent, 2 in New Castle, and 1 VoTech District.) New York City and Los Angeles each have only one school district.

Governor Carney’s first executive order creates a working group to consider a public-private partnership between Delaware’s Economic Development Office and the business community. Perhaps an education component should be added to the mix to reflect the previous business/education initiative. Recently the governor created a board to study government efficiency. Since education makes up about one-third of the state’s budget, if you have read this far in the article, you know this author’s position on education efficiency.

A reduced deficit, an improved economy, and higher student performance, now that’s a bold solution everyone can support.

Ronald R. Russo is a Senior Fellow at the Caesar Rodney Institute, and the Founding President of the Charter School of Wilmington.

The Obama Administration set records on expansive and expensive new environmental regulations. In one example, compare the 56 federal implementation plans forced on states during the Obama years to the 5 total imposed by the combined Clinton and Bush presidencies. Unfortunately, the Obama years also yielded the slowest regulation driven environmental gains in decades, 2% in seven years compared to 2% a year from 1980 to 2009.

The primary force for a better environment turned out to be innovations in natural gas production, a development the administration and environmental groups fought, that was carried out by private industry on private lands. Natural gas prices dropped 80% as producers figured out how to use horizontal drilling and hydraulic fracturing to release tightly held gas from shale formations. Falling natural gas prices dragged down the price of coal and oil that shows up in lower electricity, gasoline, and heating costs, and is saving families over $1500 a year in lower energy prices! Fuel switching from coal to cleaner burning natural gas at power plants added almost another 5% improvement in air quality.

Obama era regulations targeted three primary substances; ground level ozone and fine particles the Environmental Protection Agency claimed posed a health hazard, and carbon dioxide the EPA linked to rising global temperatures. Ozone levels improved by 1% a year up to 2009, but only improved 1% in seven years under Obama. Fine particles improved 3% a year up to 2009, but only improved 3% over seven years under Obama. The Obama regulatory effort reduced carbon dioxide emissions by an amount that will lower global temperatures by 0.01°C by 2100, essentially zero impact! Carbon dioxide reductions from power plants can be attributed 70% to fuel switching for lower prices, and 30% to new regulations.

EPA cost benefit analysis showed new regulations would cost tens of billions of dollars a year to implement. Free market sources, such as, the US Chamber of Commerce, estimated the cost to more likely be hundreds of billions of dollars. Either way, a lot of money for marginal air pollution improvements.

The problems don’t end with air pollution regulations. Voluntary multistate programs to improve water quality in areas such as the Chesapeake Bay brought Water Quality Index improvements of 25-percent from 1986 to 2010. That improvement ended after the voluntary agreement became a regulation in 2010 requiring states to institute mandatory steps, such as, storm water management regulations. No water quality improvement, but those regulations have managed to increase new home prices by $10,000 each in the Chesapeake watershed.

Aggressive requirements in motor vehicle miles per gallon standards were also mandated. The latest information shows average MPG for the nations motor vehicle fleet actually dropped from 17.6 MPG in 2009 to 17.5 MPG in 2014. The mandated MPG standards were unreachable and will likely be scaled back to a more practical level by the Trump Administration.

The Obama Administration, often through procedural short cuts and with support from questionable science, relied on ineffective regulations to “improve” the environment. Predictably, results were poor. We look forward to the Trump Administration rolling back bad regulations, and following the rule of law. We expect a focus on actual improvements to the environment. This could include increasing infrastructure spending on securing drinkable water (remember Flint?), improving sewer systems, and reclaiming brownfields and Superfund sites. Under the new administration, infrastructure spending could double without increasing the budget by using sources such as multi-billion dollar fines from the Volkswagen settlement for fudging tail pipe emissions, and other large settlements instead of handing them over to the Sierra Club and Greenpeace, favored interest groups of the Obama EPA administration.

David T. Stevenson, Director, Member Trump Administration EPA Transition Team

E-Mail: David Stevenson@CaesarRodney.org

Executive Summary

There are two pollutants listed for action in the Clean Air Act that still have potential negative health impacts according to the EPA; fine particles (PM2.5) and Ozone. Dramatically tightened rules from the Obama Administration on power plants, motor vehicles, and the Ozone National Ambient Air Quality Standard had essentially no impact on emission levels of those two pollutants.

A number of major regulations have been implemented since 2009. The motor vehicle industry saw a dramatic increase in the requirements for higher Corporate Average Fuel Economy, and tighter emission guidelines. Electric power plants have seen the most impact from regulation including the Mercury & Air Toxics Rule (MATS), the Cross State Air Pollution Rule (CSAPR), the Carbon Pollution Standard for New Power Plants which established New Source Performance Standards (NSPS), and the Clean Power Plan (CPP), all targeted at reducing the use of coal. Two reductions in the NAAQS for maximum Ozone levels tightened the standard by 12.5% and impacts all applications burning fossil fuels.

Fine particle levels were reduced by 3%, but 93% of the U. S. population already lives in areas in compliance with national standards. There was less than 1% reduction in Ozone levels between 2009 and 2015, and it is likely 2016 Ozone levels will show zero improvement from 2009 as it was a hot summer which leads to higher Ozone levels. It is unlikely the regulations will have any additional significant impact going forward. Regulations reduced Carbon dioxide emissions roughly 0.5 billion metric tons annually, but the impact of that on global temperatures in 2100 will be less than 0.01°C.

The entire country is in compliance for Carbon Monoxide, and Nitrogen Dioxide, and will be in compliance by the end of 2017 for

Sulphur Dioxide averaged 66% below the standard, and only ½% of the country is above the

Fine particles ten micrometers or smaller averaged 65% below the standard, and only 3% of the country is above the

Fine particles 2.5 micrometers or smaller averaged 29% below the standard, and only 7% of the country is above the

Ground level Ozone averages 1% below the standard, but 37% of the country is above the

The EPA publishes an aggregate of reductions in ambient air quality levels by averaging annual results for six pollutants and ground level Ozone. There have been major improvements with a net 62% reduction since 1980. However, progress since 2009 has been small with most of the improvement related to non-regulatory induced reductions in the price of natural gas. Pricing impacts can be seen starting in 2009 in lower operating hours for coal- fired power plants, with regulatory changes apparent beginning in 2012 with lower coal-fired generating capacity, so calculations are straight forward. Power plant air quality improvements are due 70% to lower natural gas prices, and 30% to new regulations.

Both influences are unlikely to lead to any further improvement in air quality. Regulatory changes for motor vehicles have had almost no impact as fuel use increased 3% and average fuel economy went down ½%. The EPA reported tons of emissions from motor vehicles dropped between 2009 and 2014; carbon monoxide by 16%, volatile organic compounds by 20%, and nitrogen dioxide by 26%. None of those pollutants currently pose a health risk as ambient levels are way below the point they impact health.

Motor vehicle emissions improvements should show up primarily in lower Ozone levels. Ozone ambient levels came down less than 1% in seven years. Clearly, the tougher motor vehicle standards had very little impact on ambient levels of Ozone. We suspect the lack of progress in improving Ozone levels is related to the fact we are most likely approaching natural background levels. Any regulation to reduce ozone will be very expensive with very little positive result.

The air quality impact of new regulations promulgated by the Obama Administration have pretty much run their course. The MATS regulation failed to follow the Administrative Procedures Act by not completing a proper cost/benefit analysis and was overturned by the courts. The Impact of MATS was already completed by the time the courts ruled, and those impacts duplicated most of the potential impact of the Cross State regulation. It is likely the Clean Power Plan will be overturned by the courts, and will certainly be withdrawn by the Trump Administration. The gasoline mileage targets set by the Obama Administration are unrealistically high, and are unlikely to have been met. The Trump Administration will likely review the targets and cut them back to more realistic levels. Plus, it takes fifteen years to turn-over the vehicle fleet so progress on reducing pollution will be slow.

Natural gas prices are unlikely to fall further. In fact, it is more likely they will increase.

European natural gas prices are running 2.5 times higher than U. S. prices. There is a huge drive to export from the U. S. to Europe which requires expensive capital investment to liquefy the gas to allow shipment in an efficient manner. A number of Liquefied Natural Gas plants are under construction, and natural gas prices should rise as exports begin. Higher natural gas prices should lead to a slight electric generation shift back to coal raising coal generation capacity factors. Some planned closings of coal-fired power plants will likely continue, but it is likely the plant closing trend would end under either administration.

Methodology

Break out the components of the aggregate air quality improvement reported by the EPA. Compare the timeline of potential key change agents to actual results and historic trends to determine the most likely change agents impacting air quality. Review data to quantify the relative impact of various change agents.

Criteria Pollutants

The Clean Air Act establishes a list of pollutants to be regulated by the Environmental Protection Agency. The EPA is to review National Ambient Air Quality Standards (NAAQS) for each pollutant every five years. Air Quality Monitoring Stations scattered around the country measure various pollutants. Dramatic progress has been made since 1980, and the first five pollutants listed below are now not monitored at most stations. The emission source relative contribution is listed in parenthesis.

CO – Carbon Monoxide, 69 sites (NAAQS 9 ppm 8 hour average, not to be exceeded more than once a year). The standard was last revised in 1971, there are no non-attainment areas with the national ambient average 84% below the standard, with the primary source of emissions being motor vehicles (54%), and miscellaneous sources (35%).

Lead – 8 sites (NAAQS 0.15 micrograms/m3 maximum of three month rolling average). The standard was last revised in 2008, there will be no non-attainment areas by the end of 2017 with the national ambient average 85% below the standard, with the primary remaining source being lead smelters.

SO2 – Sulphur Dioxide, 45 sites (NAAQS 75 ppb 99th percentile of one hour daily maximum, averaged over three years). The standard was last revised in 2010, there are 2 million people living in non-attainment areas in small pockets around the country with the national ambient average 66% below the standard, with the primary source being fuel combustion including coal- fired power plants (82%).

NO2 – Nitrogen Dioxide, 26 sites (NAAQS 100 ppb 98th percentile of one hour daily maximum, averaged over three years). The standard was last revised in 1971, there are no non- attainment areas with the national ambient average 55% below the standard, with the primary sources being motor vehicles (58%) and fuel combustion including power plants (29%).

Nitrogen Dioxide (NO2) is the primary source for Nitrous Oxide (NO) when ultraviolet light strips off an oxygen atom, and of other nitrogen oxides (NOx). Nitrous Oxide is the required catalyst to create Ozone. It is produced directly from the burning of fossil fuels but is very reactive and has a short lifespan in the atmosphere.

PM10 – Particulate Matter ten micrometers or smaller, 171 sites (NAAQS 150 micrograms/m3 averaged over 24 hours, not to be exceeded more than once per year on average over three years). The standard was last revised in 1987, there are 9 million people living in non- attainment areas primarily in California and in pockets in other western states with the national ambient average 65% below the standard, with the primary source being miscellaneous including forest fires, dust, and volcanoes (87%), fuel combustion including power plants (5%), and industry (5%).

PM2.5 – Particulate Matter 2.5 micrometers or smaller, 480 sites (NAAQS 12 micrograms/m3 annual mean, averaged over three years). The standard was last revised in 2012, there are 23 million people living in non-attainment areas primarily in California with small pockets in Ohio and Pennsylvania with the national ambient average 29% below the standard, with the primary source being miscellaneous including forest fires, dust, and volcanoes (71%), coal-fired power plants (14%), motor vehicles (6%), and industry (7%).

Ozone – 212 sites (NAAQS 70 ppb annual fourth highest daily 8 hour maximum, averaged over three years). The standard was last revised in 2015, there are 119 million people living in non- attainment areas primarily in high population density urban areas with the national ambient average 1% below the standard. Ground level Ozone is not emitted directly, but is created in a chemical reaction between oxygen and volatile organic compounds, methane, and carbon monoxide in the presence of sunlight and a nitrous oxide catalyst. High temperatures accelerate reactions leading to summer time peaks in ambient Ozone levels. It is more difficult to weight Ozone precursor sources, but the EPA shows natural sources may make up 50%.

Nitrogen oxides come from motor vehicles (58%), and other fuel combustion including power plants (29%). Volatile organic compounds (VOC) come from industry (39%), natural biogenic (33%), and motor vehicles (23%). Other natural sources, such as, wildfires and methane also play a role. We do note maps of modeled ambient NOx levels show the greatest peaks near major highways and NOx is critical for Ozone production (see below map).

Source: ICF International using EPA Modeling Programs

Air Quality Changes

The EPA publishes an aggregate of reductions in ambient air quality levels by averaging annual results for six pollutants and ground level Ozone. Table 1 summarizes the raw data, and Table 2 summarizes the percent reductions with the data from the EPA Air Quality Trends website at https://www.epa.gov/air-trends. Table 3 lists emission inventory, and Table 4 highlights the percentage point improvement of each pollutant.

Note: SO2 and PM2.5 account for over two thirds of the aggregate improvement of air quality

Regulatory Impacts

A number of major regulations have been implemented since 2009. The motor vehicle industry saw a dramatic increase in the requirements for higher Corporate Average Fuel Economy, and tighter emission guidelines. Electric power plants have seen the most impact from regulation including the Mercury & Air Toxics Rule (MATS), the Cross State Air Pollution Rule (CSAPR), the Carbon Pollution Standard for New Power Plants which established New Source Performance Standards (NSPS), and the Clean Power Plan (CPP), all targeted at reducing the use of coal. Two reductions in the NAAQS for maximum Ozone levels tightened the standard by 12.5% and impacts all applications burning fossil fuels.

The EPA reports the primary health impacts of pollutants are related to fine particulate matter (PM2.5) and Ozone. Motor vehicles have a small impact on fine particles (6%), but are the greatest influence on Ozone precursors providing 58% of the Nitrogen Dioxide, 54% of the Carbon Monoxide, 23% of the Volatile Organic Compounds. Between 2009 and 2014 (latest data available) motor vehicle miles driven increased 2.3%, fuel use increased 3%, and average fuel economy actually decreased 1/2 % from 17.6 MPG to 17.5. The EPA reported tons of emissions from motor vehicles dropped between 2009 and 2014; CO by 16%, VOC by 20%, and NO2 by 26%. Despite dramatic new regulations on motor vehicles, Ozone ambient levels came down less than 1% in seven years. Clearly, the tougher motor vehicle standards had very little impact on ambient levels of Ozone.

We suspect the lack of progress in improving Ozone levels is related to the fact we are most likely approaching natural background levels. It takes a very small amount of NO to fill its catalytic role, and the supply needed is readily available from sunlight interacting with just about any level of NO2. We compared Ozone levels over several years in very urban Wilmington, DE to very rural Lewes, DE. Ozone levels were essentially the same both on average and for peak times during the May through September Ozone Season. We found no correlation between daily NO2 levels and Ozone despite the fact NO2 averaged six times as high in Wilmington. Similarly, almost 95% of manmade VOC’s come from motor vehicle and industrial sources. We expect Wilmington to have very high levels of manmade VOC’s while Lewes would have almost none (VOC’s are not measured in Lewes). Yet the Ozone levels were essentially the same. At this point, naturally occurring Ozone is swamping human impacts.

Coal-fired power plants account for up to 82% of Sulphur Dioxide (SO2) emissions which are precursors to fine particles, and about 40% of direct fine particle (PM2.5) emissions. Only about 1/2% of Americans live in areas above air quality standards for SO2, and 7% live in areas above the fine particle standard. As noted above, reduced SO2 and PM2.5 account for about two thirds of the aggregate improvement in air quality from 2009 to 2015. EPA emission inventory shows direct PM2.5 emissions didn’t change during the period but SO2 emissions were cut in half.

The key question is how much of the improvement in power plant emission reduction was caused by EPA regulations. As shown in Chart 1 below, natural gas prices dropped significantly starting about 2009 driven by an increase in supply from the deployment of hydraulic fracturing and horizontal well drilling technology in shale formations. EPA regulations began taking effect in 2012. Lower prices played a major role in a switch from coal to natural gas for electric generation starting in 2009, and regulations impacted generation capacity starting in 2012.

Chart 1

Source: US Energy Information Agency

Total electric generation has been relatively constant since 2003, but increased almost 3% from 2009 to 2016 as the economy recovered from the recession (Chart 2 below). That increase in demand was met with wind and solar power growth driven by state Renewable Portfolio Standards along with federal and state subsidies. Coal-fired generation was relatively constant until 2008, and began to fall in 2009. The fall paralleled declining natural gas prices. Natural gas generation has been increasing for decades at a relatively constant rate.

Chart 2

Source: US Energy Information Agency

EPA regulations did impact coal-fired generation capacity as shown in Chart 3. Many older, smaller power plants were shut down rather than invest in expensive filtration equipment that would be needed to meet new standards. The downturn in coal capacity coincides with new regulation implementation beginning in 2012.

Chart3

Source: US Energy Information Agency

However, more important to coal-fired generation was the change in how often power plants ran in comparison to natural gas-fired power plants over time (Capacity Factor) which is shown in Chart 4. The decline tracks the falling natural gas price curve.

Chart 4

Source: US Energy Information Agency

We can parse the relative impact on generation between regulatory induced capacity reductions and price driven capacity factor shifts from fuel switching. In 2008, before any impact of lower natural gas prices or new regulations, there was 1,986 million megawatt-hours of coal fired power produced by 337,300 megawatts of capacity at a 73% capacity factor. In 2016, 1,211 million megawatt-hours of power was produced from 295,986 megawatts of capacity at a 51 % capacity factor for a net loss of 775 megawatt-hour, or a 39% reduction. If the capacity factor had stayed the same, the lower 2016 capacity would have produced 1,743 million megawatt-hours of power for a 243 megawatt-hour, or 12% reduction. So, lower natural gas prices resulted in 69% (532/775) of the power reduction and 31% (243/775) was a result of new regulations. All generation data is from the US EIA Electric Power Monthly.

The final calculation is to adjust each of the aggregate reduction contributors for non- regulatory change impacts (Table 5). There were no new regulations for lead and PM10. Motor vehicles and power plants accounted for 54% of CO emissions, 87% of NO2 emissions, and we assume 50% for Ozone although it could be as low as 10%. Therefore, air quality only improved 1.9% from 2009 to 2015 because of regulations, or about 0.27%/year.

Table 5: Adjusted Aggregate Improvement in Air Quality 2009 to 2015

Pollutant

% Point Reduction

% from Reg. Change

Net Point Reduction from Reg.

CO

3.5

54

1.9

Lead

4.2

0

0

SO2

16

31

5

NO2

3.1

87

2.7

PM10

0.6

5

0

PM2.5

9.7

31

3

Ozone

0.9

50

0.5

Total/7 Pollutants

1.9

Carbon Dioxide Emissions

According to the U.S. Energy Information Agency total carbon dioxide emissions fell 12% from 2005 to 2015 from 6,023 million metric tons to 5,300. Electric generation accounted for 68% of that reduction as the industry switched from coal to natural gas which has about half the carbon dioxide emissions per megawatt-hour as coal. Most of the balance of reductions came from the transportation sector. As calculated above, lower natural gas prices drove 69% of the electric generation reductions, so in total, market forces drove about 47% of the total carbon dioxide reduction, or 226 million metric tons. Regulations cut emissions by 497 million metric tons. That reduction will lower global temperatures by 0.007°C by 2100.

Going Forward

The air quality impact of new regulations promulgated by the Obama Administration have pretty much run their course. The MATS regulation failed to follow the Administrative Procedures Act by not completing a proper cost/benefit analysis and was overturned by the courts. The Impact of MATS was already completed by the time the courts ruled, and those impacts duplicated most of the potential impact of the Cross State regulation. It is likely the Clean Power Plan will be overturned by the courts, and will certainly be withdrawn by the Trump Administration.

Natural gas prices are unlikely to fall further. In fact, it is more likely they will increase. European natural gas prices are running 2.5 times higher than U. S. prices. There is a huge drive to export from the U. S. to Europe which requires expensive capital investment to liquefy the gas to allow shipment in an efficient manner. A number of LNG plants are under construction, and prices should rise as exports begin. Higher natural gas prices should lead to a slight electric generation shift back to coal raising coal generation capacity factors. Some planned closings of coal-fired power plants will likely continue, but the closing trend would end under either administration.

The gasoline mileage targets set by the Obama Administration are unrealistically high, and are unlikely to have been met. The Trump Administration will certainly review the targets and cut them back to more realistic levels. Plus, it takes fifteen years to turn-over the vehicle fleet so progress on reducing pollution will be slow. As discussed above, it appears no regulatory or market action will likely improve Ozone ambient levels as we are so close to natural background levels. Ozone levels were reduced by less than 1% from 2009 to 2015, but higher temperatures in the US in 2016 will likely wipe out even that small gain.

Conclusion

There are two pollutants listed for action in the Clean Air Act that still have potential negative health impacts; fine particles (PM2.5) and Ozone. Dramatically tightened rules from the Obama Administration on power plants, motor vehicles, and the Ozone National Ambient Air Quality Standard had essentially no impact on emission levels of those two pollutants. Fine particle levels were reduced by 3%in seven years, but 93% of the U. S. population already lives in areas in compliance with national standards. There was less than 1% reduction in Ozone levels between 2009 and 2015, and it is likely 2016 Ozone levels will show zero improvement from 2009 as hot summers lead to higher ozone levels. It is unlikely the regulations will have any additional significant impact going forward. The regulations reduced Carbon dioxide emissions roughly 0.5 billion metric tons, but the impact of that on global temperatures in 2100 will be less than 0.01°C